2015 – In Review – The Year Volatility Returned

By February 4, 2016 Newsletter No Comments

If 2015 could be summarized in one word, volatile would probably be it. A slowing Chinese economy, plunging commodity prices and a stock market crash in August that wiped trillions from the global exchanges were just some of the main themes that dominated the year. At the same time, 2015 the year volatility returned witnessed a clear divergence in monetary policy between the United States and the rest of the world. The case is still out as to whether the Federal Reserve’s decision to lift interest rates in December contributed to the global equities rout in January 2016. What we do know is that the move contrasted sharply with the actions of more than a dozen other central banks, which eased monetary policy further last year to support their struggling economies.

China’s Slowing Economy
China was at the center of last year’s storm, as it became clear to investors that they could no longer rely on runaway growth in the world’s second-largest economy. China’s gross domestic product (GDP) – the value of all goods and services produced in the economy – expanded 6.9% in 2015. That was the slowest pace of expansion in 25 years and slightly below Beijing’s official target of 7%.[1] What’s more, China’s economic growth is forecast to slow in each of the next three years.[2]

Black Monday
China’s instability extended far beyond its own borders last year. The “Black Monday” market crash of August 24 actually had its origin two weeks earlier when the People’s Bank of China (PBOC) unexpectedly devalued its currency, the yuan, for the first time in two decades in response to plunging exports.[3] The move sent shockwaves throughout the world, resulting in staggering losses leading up to and including August 24, a day simply known as Black Monday. Hundreds of billions of dollars wiped from global stocks that day, with markets in Asia, Europe and North America suffering their biggest single-day loss in at least four years. The period between August 11 and August 24 saw more than $5 trillion evaporate from the global stock markets.[4] Despite repeated attempts to limit capital flows from its country, the PBOC has been unable to curb volatility. Months of regulatory efforts were undone in January 2016 when massive losses forced China’s major exchanges to suspend trading on two separate occasions.

Oil Price Collapse
The oil price shock intensified in 2015, as the Organization of the Petroleum Exporting Countries (OPEC) aggressively maintained market share by keep production levels elevated. Underpinning the massive price collapse that continued well into 2016 has been a persistent oversupply of crude in the global market. A slowdown in Chinese demand, peak OPEC production and a US shale boom all came together to knock more than 30% off the price of international benchmark Brent crude in the 2015 calendar year. For major oil producing nations such as Canada, Russia, Norway, Venezuela and Saudi Arabia, the oil price collapse has had significant consequences. Weak oil prices also hammered energy companies, which were forced to scale back investment plans and lay off thousands of workers. Energy shares on the S&P 500 declined nearly 24% in 2015, the biggest decline of any industry.[5]

Strong US Dollar
The US dollar continued to assert its dominance on the global currency markets in 2015. The dollar index, a weighted average of the US currency against a basket of world rivals, rose more than 6% in 2015, extending its 18-month gain to around 21%. A strong dollar hasn’t been good news for the US economy; it is partly responsible for the sharp slowdown in the country’s manufacturing sector, as well as the earnings recession on Wall Street. US corporate earnings declined in each of the last three quarters of 2015,[1] marking the worst earnings recession since the financial crisis. What’s more, Goldman Sachs tipped the US dollar as its best trade for 2016, indicating that more gains are in store for the greenback.[2]

Federal Reserve Lifts Rates
One of the biggest stories to unfold in 2015 occurred in the last two weeks of the year when the US Federal Reserve increased its short-term interest rate for the first time in more than nine years. While the move was minimal – reflecting a 25 basis point jump to 0.5% from 0.25% – it signaled a turning of the tide for the US economy. Policymakers were finally confident in the economic recovery, and could finally justify a raising of the federal funds rate. The central bank’s “dot plot” summary of interest rate forecasts also suggested that US interest rates could rise four more times in 2016.

The first month of 2016 had major implications on each of these themes. Economic growth, stock market volatility, collapsing oil prices, a strong dollar and the response of central banks cut at the very heart of the global financial system. It’s very likely that these themes will prevail once again in 2016. The International Monetary Fund’s revised World Economic Outlook, aptly titled “Subdued Demand, Diminished Prospects,” portrays this gloomy outlook in a series of downward revisions to global and national GDPs.[3] The picture is unlikely to change very drastically over the next 11 months.

[1] CBC News (January 19, 2016). “China’s 2015 GDP growth at 25-year low of 6.9%.” CBC News.

[2] Ansuya Harjani (August 31, 2015). “Goldman takes a knife to China GDP forecasts.” CNBC.

[3] Peter Spence (August 19, 2015). “How China devalued the yuan for the first time in two decades, and why it matters.” The Telegraph.

[4] Brianna Lee (August 24, 2015). “‘Black Monday’: Global Stocks Have Lost $5 Trillion Since China’s Yuan Devaluation.” IB Times.

[5] Marley Jay (December 31, 2015). “Consumers and health care buy generic antibiotics stocks led the S&P 500 winners in 2015; energy stocks plunged.” U.S. News.

[6]At the time of writing, blended earnings for S&P 500 companies are down 5.8% for 2015 Q4, based on 40% of companies to have reported through January 29, 2016. Source: FactSet.

[7] Marc Jones and Jamie McGeever (November 19, 2015). “Rising U.S. dollar tops Goldman Sachs’ 2016 trade tips.” The Globe and Mail.

[8] International Monetary Fund (January 2016). “Subdued Demand, Diminished Prospects.” World Economic Outlook.


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